China Communications Services Corporation Limited

Hot Topics

Q1. What was the major reason for the negative growth in net profit in 2013? What measures
       will be adopted by the Company to improve the performance?
In 2013, the profit attributable to equity shareholders of the Company amounted to RMB2,238 million, representing a decrease of 7.0% from the previous year. Gross profit margin was 15.2%, decreased by 0.7 percentage point. The change in operating results in 2013 was attributable to various factors, mainly including the slowdown in revenue growth and decrease in gross margin.

In light of the progress of 4G license issuance in China, the domestic telecommunications operators were overall more prudent in network construction investment in 2013. In addition, the industry landscape was also affected by the structural changes in capital expenditures of the domestic telecommunications operators and the implementation of new industry regulatory policies, which accelerated the openness and competition in the communications market . Moreover, the Group was also affected by changes in revenue composition and new regulatory policies such as the replacement of business tax with value added tax and the amendments to the PRC tender regulations. Near the end of 2013, the Group devoted more resources to undertake more 4G network construction projects, also affecting its operating results to certain extent.

The Company has taken various measures to maintain profitability, which includes the optimization of business structure by increasing revenue contribution from high margin businesses, and prudently controlling the growth of businesses with low value. Moreover, the Company will enhance cost control and promote continuous innovation of business model by collaboration on resources and capabilities.
Q2. What was the impact on the Company's domestic telecommunications operator market
       regarding the issuance of 4G license near the end of 2013? What is the prospect of
       domestic telecommunications operator market?
The revenue growth of the Group from domestic market slowed down in 2013 as the domestic telecommunications operators were overall more prudent in network construction investment in light of the progress of 4G license issuance in China. In December 2013, TD-LTE 4G licenses were issued to three telecommunications operators and the Group gradually undertook more 4G related network construction projects near the end of 2013, which have begun to drive the revenue growth of the Group.

Based on the understanding of the development trend of the telecommunications industry in China and experiences in serving customers over the past years, the Group believes that there is still new room of market development for domestic telecommunications operators. Firstly, the capital expenditure, as well as the investment in the network optimization and maintenance of domestic telecommunications operators will maintain steady growth. Secondly, the PRC government has implemented the policy of "Broadband China”, issued virtual operator licenses, promoted the new type of urbanization and information consumption, thus increasing its investments in the information industry. Thirdly, industry development including big data, cloud computing, platform, mobile Internet and customer premises network have generated huge demands for business support and customer service systems. The domestic operator market will continue to provide the Company with enormous business opportunities.
Q3. The domestic non-operator market and the overseas market both achieved double-digit
       growth in revenue in 2013. Will this growth trend sustain in the future?
The Group regards the domestic non-operator market and overseas market as the two new growth drivers, and it strives to expand into these markets proactively and grow its business systematically. During 2013, the expansion into the two new markets that the Group has strived to explore has gradually shown positive results, signifying its right strategic positioning and development direction. In 2013, incremental revenues from domestic non-operators and overseas customers accounted for almost half of the total incremental revenues and their proportion to total revenues also increased. Revenues contribution from these two new markets accounted for 36.7% of the Group's total revenue in 2013.

In 2013, the progress of new urbanization and informatization in China continued to accelerate, and the construction of "Smart City” was also burgeoning. Driven by strong domestic demands in information consumption, the Group proactively explored governmental customers and participated in "Smart City” projects by offering high-end consulting services, which achieved satisfactory results. Furthermore, the Group endeavoured to solicit customers from real estate construction and transportation industries, and steadily promote small and medium-sized enterprises ("SME”) customers, which showed a favourable development momentum. In 2013, the revenue from domestic non-operator customers increased by 16.1% compared to that of last year, representing 31.1% of the total revenues.

In 2013, demands for communications network construction in the overseas market remained strong. The Group further optimized its overseas revenue structure and vigorously developed large turnkey projects, increasing revenue contribution from overseas turnkey projects remarkably. In addition, the Group started to implement the third step of its "Strategy of Overseas Market-Focused and Four-Step Approach” by undertaking an operation and management outsourcing project for an overseas operator. In 2013, the revenue from overseas customers increased by 11.8% compared to that of last year, representing 5.6% of the total revenues.

Looking forward, the government is promoting new urbanization and information consumption, and devoting more efforts to develop the information industry as a new driver of economic growth, all of which brought opportunities for the Group to accelerate the expansion into the domestic non-operator market. Regarding the overseas market, emerging regions saw a continuous increase in the demand for establishing "Broadband Countries, Smart Capitals and Regional Hubs”. The Group will also speed up its expansion into the overseas market with the support of national policies.
Q4. What was the reason for the negative free cash flow in 2013? Why did the account
       receivables turnover days increase in 2013? How does the Company enhance its cash
In 2013, the free cash flow of the Group was RMB-324 million, and the net cash inflow from operating activities was RMB321 million. The decrease in free cash flow as compared with the same period last year was mainly due to the lengthened repayment cycle of its major customers. Besides, the Group devoted more resources to undertake more 4G network construction projects near the end of 2013 also affecting its operating results to certain extent. In 2013, the account receivables turnover days increased from 115 days in 2012 to 125 days (The account payable turnover days were 140 days in 2013). The increase of account receivables was mainly attributed to the domestic telecommunications operators, which posed relatively low risk to the Company.

The Group will, on the one hand, strengthen cash flow management, which includes enhancing analysis on ageing and customer mix of account receivables, increasing frequency of assessment on account receivables, pushing on more stringent collection on account receivables and leveraging financial instrument proactively by adopting account receivable financing for certain overseas projects. On the other hand, the Group will continue to enhance the operation of funding pool, and increase funding utilization efficiency by the two tier funding pool in head quarter and provincial subsidiaries.
Q5. What is the dividend of China Comservice for 2013?
We have high regards to the views and wishes of investors and always make great efforts in enhancing shareholders' return. Having considered the interests of and returns to our shareholders, the Board proposed to maintain a 40% payout ratio and pay a final dividend of RMB0.1293 per share for the financial year ended 31 December 2013. In future, we will determine our dividend policy by taking into consideration of the factors such as business development needs, cash flow status, CAPEX requirement, and M&A opportunities. The Company will continue to make decisions that benefit the overall development of the Company and are aimed to maximize the shareholders' return. (Please refer to "Dividend History" for more details)

Basic Information

Q1. What kind of Company is China Comservice?
China Comservice (China Communications Services Corporation Limited) is a leading service provider in the PRC that provides integrated support services in the informatization sector including telecommunications, media and technology. It is also the largest telecommunications infrastructure service provider in the PRC. Our services include telecommunications infrastructure services (TIS) covering design, construction and project supervision and management; business outsourcing services (BPO) covering network maintenance, distribution of telecommunications services and products, and facilities management; applications, content and other services (ACO) covering system integration, software development and system support, value-added services and other services. (Please refer to "Corporate Profile" and "History" for more details)
Q2. When was China Comservice listed?
The Company was listed on the Stock Exchange of Hong Kong on December 8, 2006. The offering price was HK$2.20 per share. (Please refer to "Corporate & Shares Information" for more details)
Q3. Who are the major customers of China Comservice?
All major telecommunications operators in China, namely, China Telecommunications Corporation ("China Telecom"), China Mobile Communications Corporation ("China Mobile") and China United Network Communications Group Company Limited ("China Unicom") are our customers. We also provide services to domestic non-operator customers and overseas customers. In 2013, the Group attained a relatively stable customer mix. Revenue from domestic telecommunications operator customers accounted for 63.3% of total revenues. Revenue from domestic non-operator customers accounted for 31.1% of total revenues and revenue from overseas customers accounted for 5.6% of total revenues.

While further developing domestic telecommunications operator market, the Group has also endeavored to expand the domestic non-operator market. The Group proactively provides services, such as city pipelines engineering, intelligence building and cloud computing data center construction, to key customers such as government agencies and customers in the industries of construction and property, transportation, etc.

Other than China, the Group's business also covers over 50 countries and regions in the world, and its overseas expansion is mainly focused on markets such as Africa, Middle East, Asia Pacific and Latin America. We provide integrated solutions for ancillary communications networks and integrated informatization solutions for the overseas telecommunications operators and other customers through engaging in turnkey projects and subcontracting projects.
Q4. Who are the major shareholders of China Comservice?
China Telecommunications Corporation is our controlling shareholder which holds 3,559 million domestic shares, representing 51.4% of our total issued shares. In addition, China Mobile Communications Corporation, China United Network Communications Group Company Limited and China National Postal and Telecommunications Appliances Corporation hold 608 million, 236 million and 131 million domestic shares, representing 8.8%, 3.4% and 1.9% of total issued shares respectively. The public holding is 2,391 million H share, representing 34.5% of our total issued shares. (Please refer to "Shareholding Structure" for more details)
Q5. What are the telecommunications infrastructure services provided by China Comservice?
The Group is the largest telecommunications infrastructure service group in the PRC, providing a full range of telecommunications infrastructure services to telecommunications operators in China and overseas. These services include planning, design, construction and project supervision for fixed line, mobile, broadband and support systems. The Group also provides integrated solutions for ancillary communications networks and integrated informatization solutions for domestic non-operator customers such as government agencies, industrial customers and SME's, as well as overseas customers. (Please refer to "Business Overview" for more details)
Q6. What is the distribution service under Business Process Outsourcing (BPO) Service?
Distribution service means distribution of telecommunications services and products. The distribution services of the Group include the wholesale and distribution of communications machineries and handsets, logistics, procurement agency services. Our major customers are telecommunications operators, telecommunications equipment manufacturers, government agencies and medium to large-sized enterprises. (Please refer to "Business Overview" for more details)

As an integrated support service provider, our provision of distribution service enables us to cover both front end and back end services all along the value chain of telecommunications operator customers. This helps us to provide integrated services serving all aspects of the value chain, strengthen our competitive advantage of comprehensive one-stop service provision and promote our service value, therefore improving our customer loyalty and benefiting our long term business development
Q7. What is the ACO service?
ACO means Applications, Content and Other services. The Group provides system integration, software development, system operation and maintenance support, value-added services to the domestic telecommunications operators, industrial customers and etc. (Please refer to "Business Overview" for more details)
Q8. Does the Company provide share options to its employees?
As a long term incentive and according to the regulations of the government, our Company adopted a share appreciation rights (SAR) scheme to align the interests of target employees with the Company. Under the scheme, a SAR constitutes the right to receive an amount of cash equivalent to the appreciation, if any, in the fair market value of an H share of our Company and the exercise price of the SARs. No shares will be issued under the scheme; accordingly, the shareholding of the shareholders of the Company will not be diluted by any grant of SARs.

Last Updated: 6 Jun 2014